The former CEO of the California Public Employees' Retirement System has been charged with running a "pay-to-play" scheme at the largest pension fund in the U.S., one that allegedly ensnared Apollo Global Management.

Federico Buenrostro and a friend, Alfred Villalobos, were indicted for conspiring "to create and transmit fraudulent documents" linked with CalPERS' $3 billion in investments with Apollo. Federal prosecutors say that when the pension refused to provide a disclosure letters to Apollo allowing Villalobos' placement agency to get paid, Buenrostro and Villalobos simply dummied them up. Emphasis on dummied: One letter misspelled CalPERS' name, and another was dated after Buenrostro's resignation in 2008.

CalPERS said that Villalobos' Arvco Research Capital collected some $60 million in fees, including $14 million from Apollo based on the faked letters. Buenrostro went to work at Arvco the day after he left the pension.

Apollo has not been accused of any wrongdoing and called the allegations "troubling."

The allegations are the highest-profile pay-to-play charges since a scandal at the New York State Common Retirement Fund won several convictions, including that of former New York Comptroller Alan Hevesi. Buenrostro is the highest-profile public official to face pay-to-play charges since Hevesi, who spent a year in prison.

The criminal case against Buenrostro and Villalobos is the culmination of a four-year investigation, one that has already produced both state and Securities and Exchange Commission civil charges against the two men. The scandal prompted California to ban placement agents from receiving fees based on whether CalPERS chose to invest with a client.

"This is a long-awaited indictment of two former officials," CalPERS President Rob Feckner said, adding that it "is another step on the road toward justice for California's taxpayers, public employees and for all of CalPERS' staff and stakeholders."

Editor's Note

In our new section, FINtech Focus, we will profile one of these firms each week. While fintech is a broad category, we will be focusing on firms that specifically cater to the alternative investment industry. Read more…